CNN Producer Kareem Khadder observed burned carpets and tiles that had been broken off pillars inside the mosque. Spray-painted graffiti in Hebrew read, "This is toilet number 18" and "Revenge and avenge."

A Palestinian woman who lives across from the mosque, Mariam al-Sheikh, said she saw smoke and fire billowing from the mosque. She said she and others threw buckets of water on the flames.

The Israeli police and military are investigating the fire, which occurred in the village of Beit Fajjar south of Bethlehem in the West Bank.

"The Palestinian government condemns this attack on the mosque by Israeli settlers," said Ghassan Khattib, director of the Palestinian government media center. "The government is very concerned because this is part of an ongoing escalation of violence by Israeli settlers. Our government holds the Israeli government responsible for not doing what it takes to prevent this escalating settler violence."

Israeli Prime Minister Benjamin Netanyahu strongly condemned the attempt to torch the mosque and instructed the Israeli security departments to act with determination to expose the criminals and prosecute them, according to a statement issued by his office. Defense Minister Ehud Barak also called for the apprehension of those responsible as quickly as possible.

"Whoever did this is a terrorist in every sense of the word, and intended to hurt the chances for peace and dialogue with the Palestinians," Barak said.

"The Israeli army views this attack with great seriousness, an investigation is underway and we hope that those responsible will be found quickly," Israeli military spokeswoman Lt. Col. Avital Leibovitch said.

Earlier this year, Palestinian officials blamed Israeli settlers for a fire that damaged a mosque in the northern West Bank.

In May, the Palestinian Authority-run WAFA news agency reported that President Mahmoud Abbas condemned that mosque fire, blaming it on "extremist settlers" and calling it a "criminal act" that represented "a threat to the efforts of reviving the peace process."